Key Takeaways:
Gold pushed toward $4,700 an ounce Monday, its highest in 15 weeks, as the debasement trade returned after a 30 percent correction from January's $5,600 record.
"Based on Treasury Department statements, market participants believe the government bond market interference may get even more aggressive," Bart Melek, Head of Commodity Strategy at TD Securities, said in a note Friday.
The U.S. Treasury's plan to buy long-dated bonds to reduce borrowing costs comes as the nation's debt surpassed $40 trillion last week. So far, the buyback has had little impact on the long end of the curve, with 30-year yields at 5.23 percent and 10-year yields near 4.70 percent. Reports suggest the Treasury can tap nearly $1 trillion in its General Account to fund the purchases.
TD Securities sees gold reaching $5,350/oz, though Melek cautioned that rising energy prices and the low bar for a Fed rate hike could delay that move. Brent crude near $94 and surging crack spreads are driving inflation expectations higher independently of the Treasury's yield-curve management.
Treasury Buyback Fuels Debasement Narrative
Nicky Shiels, Head of Research and Metals Strategy at MKS PAMP, said the debasement trade has significant potential for gold if last year is any indication. She described the sentiment as becoming a structural theme that could drive retail investors into a full-blown FOMO bubble. Shiels noted that gold remains the cleanest "debasement" hedge and the cleanest "US political intervention" hedge.
Commodity analysts at JPMorgan first applied the "debasement trade" label to gold's rally last year, when broad global diversification away from the U.S. dollar helped drive prices to a record $5,600 in January.
Energy Prices Cloud the Fed Path
While gold has momentum to move higher, Shiels added that prices may have overshot tactically. She also noted that the bar for a Fed rate hike remains low.
"One institution has a tightening bias, the other a loosening bias, aimed at the same curve," she said. "While the bar for a Fed rate hike is low, Brent crude near $94, tight diesel/product markets, and rising crack spreads are an independent inflation-expectations driver — even if Treasury succeeds in capping nominal yields, real yields/breakevens/inflation expectations can keep rising from the energy side, which is a new inflation-driven gold tailwind outside of the debasement narrative."
Melek echoed the concern, saying that with crack spreads surging along with oil, there is still the possibility the Fed will hike rates as inflation expectations rise due to the continued oil shock. He called a move to the $5,350/oz target "a little premature for now."
Gold at $4,700 sits about 16 percent below its January record of $5,600. The next inflation data release will shape expectations for the Fed's September meeting.
This article is for informational purposes only and does not constitute investment advice.
